A stabilized Chinese financial industry not only will be conducive to domestic 　　development, but will also contribute to the world economy
　　
　　BOOMING MARKETS: Real estate is red-hot in China, and that has a big impact on the financial industry as well
　　
　　On October 30, the People’s Bank of China-China’s central bank-issued the Report on Chinese Financial Stability 2006. The report concluded that China’s financial reform has undergone tremendous breakthroughs, financial risks have been handled properly, and that the Chinese financial industry is generally stable.
　　“A stabilized Chinese financial sector is good news for the world economy,” noted Liu Fuxiang, professor with University of International Business and Economics, who focuses on international finance study.
　　The report is second of its kind. The first report was issued on November 7, 2005, concluding that the Chinese financial sector was generally stable, the same as this year. However, the first report also pointed out that Chinese financial stability was confronted with 10 challenges, including the economic growth mode and the management of financial companies.
　　Liu said that, after the Asian financial crisis in 1997, when people marveled at the effort China had made to stabilize the Asian financial market, they were also worried about whether China could successfully deal with its own possible financial challenges after the full opening of the Chinese financial market at the end of this year.
　　“Judging from the current situation, there is no need to worry. The Chinese financial market is capable of dealing with all odds,” Liu said.
　　
　　
　　The eight-year trek
　　
　　From 1998, preventing and resolving financial risks has remained the focus of the Chinese financial market. Up till 2006, the Chinese financial industry has undergone fundamental changes.
　　“In the past, the high rate of non-performing assets and low level of marketization bore many risks. The capital adequacy ratio, and the asset quality have been improved. The profitability and the sustainable fiscal development have also been strengthened,” said Liu. “Currently, our banking industry is competitive even in the international market.”
　　Among the big four state-owned banks, Bank of China, China Construction Bank and Industrial and Commercial Bank of China have finished joint stock reform and are listed, with the non-performing loan rate at 5.41 percent, 3.51 percent, and 4.69 percent, respectively. Agricultural Bank of China is preparing for reform measures.
　　In the securities field, the financial report pointed out that the reshuffle of securities companies made a positive achievement. Eight securities companies, namely, China Galaxy Securities, Guotai Junan Securities, Huaxia Securities, Beijing Securities, Tiantong Securities, Southwest Securities, Xinjiang Securities and Shenyin & Wanguo Securities, have all been reshuffled, resulting in a reallocation of resources in the securities sector.
　　
　　ANSWERS FROM ABOVE: ICBC Chairman Jiang Jianqing (right) answers questions posed by reporters about the bank’s recent IPO as a Merrill Lynch representative (left) watches closely
　　In terms of insurance, insurance companies established standardized management structures and 40 of the domestic insurance companies had changed to a shareholders’ system. By the end of 2005, the direct stock investment conducted by insurance companies reached 15.89 billion yuan.
　　“More importantly, the construction of financial infrastructure is being strengthened and the financial environment is improving,” noted Liu.
　　The report shows the payment service network system is formed and is becoming mature. An emergency mechanism, enabling quick response, was initially established with the system. At the same time, financial legislation had achieved great development. The amendment of the Company Law and Securities Law enhanced the law enforcement effort. The enterprise accounting standard was further improved, and a nationwide data network on the credit information of enterprises and individuals is now functioning. Additionally, an anti-money laundering campaign is ongoing.
　　“The Chinese Government has been working very hard to stabilize its financial market,” noted Liu.
　　Liu said that the Central Government injected 1.4 trillion yuan for the reform of state-owned banks. Adding the money to prevent financial risks in city credit cooperatives, rural cooperative funds, investment and trust companies and city commercial banks, the government had injected no less than 3 trillion yuan in all, amounting to the fiscal revenue of the whole country in 2005.
　　To secure long-term stability
　　After several years of financial reform, the Chinese financial market is opened further to the outside world.
　　The financial stability report shows that, by the end of 2005, the number of foreign-owned or foreign-funded banking institutions had reached 254, with combined assets of $87.657 billion, accounting for 1.89 percent of overall banking assets. Currently, 154 foreign banking institutions are allowed to operate renminbi business in 25 cities, and another 25 foreign financial institutions hole shares in 20 domestic financial institutions in the banking sector.
　　There are currently seven foreign-engaged securities companies. The total number of foreign-engaged fund management companies is 20, while the number of qualified foreign institutional investors is 32.
　　There are 40 insurance operational institutions involving foreign funds, 23 of which are Sino-foreign joint ventures and the remaining 17 are wholly foreign-funded with total assets standing at 40.18 billion yuan and 26.606 billion yuan respectively, accounting for 2.64 and 1.75 percent of the overall insurance assets of the country.
　　“The Chinese financial sector is gradually becoming an international financial market. After the full opening up of the Chinese financial market on December 11 this year, this trend will speed up. Therefore, it is imperative that our financial industry remains stable,” said Zhou Maoqing, researcher with Chinese Academy of Social Sciences (CASS).
　　The financial report also pointed out that the People’s Bank of China will further boost the healthy and sustainable development of the financial industry as well as its stability.
　　The report noted China should pay attention to the possible negative influence brought about by an imbalanced global economy, fluctuations of oil prices, the structural problems of the domestic economy and finance, the growing competition in the financial sector and the potential risks of financial innovation.
　　The imbalanced global economy will lead to long-term low interest rates, the hiking resource and asset prices. Meanwhile, the adjustment of the imbalanced global economy, especially a disorderly one, will magnify the swings of exchange rates of the world’s major currencies, slowing down the U.S. economy, therefore impacting China’s export and economic growth.
　　Moreover, the fluctuating supply and prices of resource products such as oil is a major concern for China, giving rise to increasing import cost and potential inflation pressure, which consequently would make the economy suffer a resources bottleneck and threaten economic sustainability.
　　The structural problems, such as excessive fixed assets investment growth, inadequate consumption, and an imbalanced international balance of payments, are plaguing sustainable economic growth, building up inflation pressure, causing excess liquidity and hikes in asset prices. These will lead to banks facing a rising credit risk along with systematic risks of the economic and financial sectors. The structural problems of the financial sector made banks shoulder some responsibilities, which should have been shouldered by the financial market. The mounting financial risks confronting banks are harmful to the healthy and sustainable development of the banking industry.
　　The report admits that the innovation ability of financial institutions is not strong and they are short of a system encouraging this.
　　“If those problems are not resolved, it is hard to maintain long-term financial stability,” said Zhou Maoqing.
　　On recognizing the difficulties, the People’s Bank of China stated in the report that China will continue to carry out sound fiscal and monetary policies, and improve and optimize macro-control in an effort to boost the sustainable and healthy development of the economy and finance. Meanwhile, the government will speed up to establish a deposit insurance system, covering all deposit financial institutions to enhance protection of depositors and supplement the current financial supervision.
　　
　　Mounting problems
　　
　　The problems affecting financial stability go far beyond what the report cited.
　　He Dexu, researcher with Institute of Finance and Trade Economics of CASS, noted that the effective market access of financial institutions is conducive to the stable development of the market. He said China needs to improve its legislation on finance and insurance.
　　The fluctuation of the macro economy, the decrease of real estate prices and real estate loans, and the loss of banking credit, caused by the fluctuation of the real estate market, are three potential risks confronting the financial market.
　　As the financial sector increases its support to the real estate industry, the latter’s capital will account for more on the financial market. According to statistics from the central bank, by the end of 2005, the loans relating to real estate reached 3.07 trillion yuan, making up 14.84 percent of the total loan balance of all financial institutions. Real estate is, to some extent, posing a threat to the whole financial sector.
　　As a matter of fact, the Shanghai Financial Stability Report issued by the People’s Bank of China on August 31 had recognized the abovementioned problems. As an important economic and financial hub of China, the financial situation of Shanghai is imperative to the overall economic situation of China. The Shanghai report revealed that the real estate development of Shanghai is heavily reliant on bank loans and that the fluctuation of the real estate market will directly affect the price of financial assets and loan quality. In 2005, Shanghai’s real estate market showed signs of cooling off. Thus special attention should be focused on risks brought about by individual housing loans due to the depreciation of mortgaged property.
　　“Although the financial stability report concludes that the financial sector is generally stable, we should not take it for granted and at the same time, we should attach great importance to other elements which will influence financial stability,” said Zhou Maoqing.

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